What are mortgage insurance premiums (MIPs)?

Federal Housing Administration (FHA) mortgage loans are designed to help people who might have trouble getting other types of mortgage loans to buy a home. 

And if a homebuyer uses an FHA-backed loan, they’re required to pay a mortgage insurance premium (MIP). Here are some things to know about how an MIP works, how much it costs and if it’s possible to remove it.

Key takeaways

• MIP is required for all borrowers who take out an FHA-backed mortgage loan. MIPs protect the lender in case the borrower can’t repay the loan.
• FHA loans typically have less strict requirements for things like credit scores and down payment amounts than conventional mortgages. 
• There are two parts of FHA MIP: upfront MIP and annual MIP. 
• Whether a borrower can cancel MIP at any point during the loan term depends on their loan’s  origination date, value, down payment and lender. 

MIP—also known as FHA mortgage insurance—is the type of mortgage insurance paid by borrowers who take out an FHA mortgage loan. 

MIP protects FHA-backed lenders in case the borrower can’t pay back the loan. And it’s required for all FHA loans, regardless of the applicant’s credit score or down payment. 

The FHA doesn’t loan money directly. It backs private lenders who issue mortgage loans. 

FHA-backed loans help people who might have trouble qualifying for a conventional loan to buy a home. That’s because FHA loans typically have less strict requirements about credit and down payments than conventional mortgage loans.

The U.S. Department of Housing and Urban Development says borrowers who put down at least 10% of the total home purchase cost may qualify for an FHA loan with a credit score as low as 500. And with a credit score of 580 or above, borrowers may qualify for a loan with a down payment as low as 3.5%. 

MIP has two parts: an upfront premium and an annual premium. 

The upfront premium is often paid as part of closing costs. But it also can generally be rolled into the loan cost and paid monthly if the borrower doesn’t have the cash to pay it all up front. 

The annual premium is calculated yearly, then divided by 12 and included in a borrower’s monthly mortgage payment. 

Both MIP and private mortgage insurance (PMI) are types of mortgage insurance that protect lenders in case the borrower can’t pay the loan. But there are a couple key differences between MIP and PMI:

• The type of mortgages they cover: MIP is paid on an FHA-backed mortgage loan. PMI is paid on a conventional mortgage loan that’s not backed by the FHA.
• Whether borrowers can avoid paying the premium: All FHA loans require MIP, regardless of the size of the down payment. But borrowers can typically avoid paying PMI with a down payment of 20% or more.

The upfront premium for all FHA loans is currently 1.75% of the loan amount.

So if a borrower gets a $200,000 FHA mortgage loan, their upfront premium would be $3,500. Remember, the upfront premium is either paid all at once with closing costs or rolled into the mortgage and paid off monthly.

The annual premium ranges from 0.45% to 1.05% of the outstanding loan balance. It depends on three factors: the loan amount, loan-to-value (LTV) ratio and the mortgage term. 

The loan amount is simply the total amount borrowed. The LTV ratio compares the loan amount to the value of the asset—in this case, the house—being purchased. The mortgage term is how long the borrower has to pay off the loan. Typically, mortgage terms are 15, 20 or 30 years, according to the Consumer Financial Protection Bureau (CFPB).

Once the annual premium is calculated, it’s divided by 12 and paid off monthly. Typically, it’s rolled into the monthly mortgage payment, so there’s no need to keep track of a separate payment. 

For more information on how annual MIPs are calculated, check out the FHA’s charts on 2023 MIP rates. 

Whether a borrower can remove the annual MIP from their FHA-backed loan depends on a few factors: the origination date of the loan, the LTV ratio, the down payment amount and the mortgage lender’s policies. 

• Loan origination before December 31, 2000: Borrowers may not be able to cancel their mortgage insurance at any point during the life of the loan.
• Loan origination from December 31, 2000, to June 3, 2013: Borrowers can ask the lender about mortgage insurance cancellation if they’ve paid at least 78% of the LTV.
• Loan origination after June 3, 2013: Borrowers who made a down payment that was less than 10% of the purchase price may not be eligible for mortgage insurance cancellation at any point during the life of the loan unless the loan term is longer than 30 years. Borrowers who made a down payment of 10% or more may be eligible for cancellation after 11 years. 

Keep in mind that the FHA doesn’t loan money directly, it backs private lenders. And each lender might have its own policies and requirements about mortgage insurance cancellation. So it’s best to contact lenders directly for more information.

FHA borrowers can’t avoid paying mortgage insurance. It’s required for all FHA-backed loans. 

But one way to lower MIP costs is to make a larger down payment. That reduces the overall loan amount, which then lowers the upfront and annual MIP amounts. 

The only way to completely avoid MIP completely is to use a different type of home loan to buy a house. But remember, conventional mortgages often have stricter requirements for things like credit and down payments than FHA-backed loans have. And you might have to pay PMI on conventional loans, too. 

Some borrowers may also refinance to a conventional loan at some point, which would remove the need for MIP. But unless you have at least 20% equity in your home, you’d still have to pay PMI on the conventional loan when refinancing, plus any closing costs and fees. 

Looking to learn more? Here are the answers to a few frequently asked questions about mortgage insurance premiums.

It’s important to know about all the costs involved in getting a mortgage loan when considering buying a home. That way, you can figure out how much house you can afford and make a plan to reach your financial goals.

If you want to know more about the home-buying process, you can start by learning about first-time home buyer loans and some important questions to ask when buying a home.